Debt watcher Fitch Ratings reaffirmed the Philippines’ long-term foreign currency rating at BBB–the lowest investment grade rating, citing the country’s strong fundamentals and at the same time noting the government’s “propensity to underspend,” the moderate size of the banking system and the risk around the real estate sector.
Fitch assigned the rating a “stable” outlook, which means the investment grade is likely to stay the same over the short term, according to a report released by the ratings agency late Tuesday.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. on Wednesday welcomed Fitch’s assessment, saying it was in recognition of the economy’s strong fundamentals, while Finance Secretary Cesar Purisima said the country remained underrated by Fitch.
The latest rating is one notch below that assigned by the two other major international credit rating agencies to the Philippines – Moody’s Investors Service and Standard & Poor’s.
The retention of the BBB- rating was widely expected, as Fitch had previously given the Philippines a “stable” outlook in its credit review in mid-November.
“Strong macroeconomic performance, the steady inflow of worker remittances and growth of the business process outsourcing industry underpins the country’s economic growth,” Fitch said in its latest rating assessment.
Fitch forecasts Philippine real gross domestic product (GDP) will grow 6.3 percent in 2015 and 6.2 percent in 2016.
The ratings agency said the key credit strength of the country is its external finances, noting that sustained current account surpluses since 2003 have supported the build-up in foreign exchange reserves and turned the country into a net external creditor.
Public finances a ‘neutral factor’
Public finances were a neutral factor in Fitch’s decision to reaffirm the Philippines’ investment grade rating as the agency saw the advantages of the government’s improving debt performance being checked by slow growth in government revenue.
“Fitch’s assessment balances declining general government debt ratios against limited progress in widening the government revenue base,” it said.
Fitch expects general government debt to decline further to 34.4 percent of GDP in 2016 from an estimated 36.4 percent at the end of 2014.
‘Propensity to underspend’
Sustained fiscal discipline and the propensity of the government to underspend keep the fiscal deficits low, it said.
The debt watcher also said abundant domestic liquidity and generally buoyant economic conditions have supported a sustained period of strong credit growth in the country.
“Growth in credit to the private sector has averaged about 16 percent over 2010 to 2014. However, the aggregate size of the banking system remains moderate. Regulators have stepped up their monitoring of risks around the real-estate sector,” Fitch said.
Fitch also pointed out that the abundance in liquidity has not led to evidence of overheating economy but it is a risk that bears monitoring over the medium-term.
The ratings agency expects the inflation outlook to remain close to the 2 percent to 4 percent target range of the Bangko Sentral ng Pilipinas (BSP), while an increase in US interest rates in the near term could ease pressure on domestic liquidity.
Recognition of economic strength
In reaction to Fitch’s assessment, BSP Governor Amando Tetangco Jr. said the decision of Fitch to keep the country’s investment grade recognized the sustained strength of key fundamentals, including the country’s healthy external payments position, stable banking sector, and within-target inflation.
“The Philippine economy has reached a level of resiliency that is more comfortable than that of its peers as a result of accumulation of sufficient foreign-exchange buffer, sturdy financial system, and price stability. All of these are anchored on prudent monetary policy and effective supervision of banks and other financial institutions,” Tetangco said.
By contrast, Finance Secretary Cesar Purisima believes the country remains underrated by Fitch.
Purisima stressed the country’s credit story is expected to further improve as the good governance agenda continues.
“Consistently robust growth and macroeconomic fundamentals built over the past four years affirm that the Philippine economic story is defined by sustainability, stability, and resiliency. Looking ahead, we expect credit ratings to further improve as the country continues to register even better fundamentals on the back of expanded fiscal space and continued governance reforms,” Purisima said.